Savers with a British-based Cyprus bank could lose money if a deal is reached
to confiscate a portion of deposits, it emerged today.

Laiki Bank, which has three UK branches – one in Birmingham and three in London – is not covered by the UK's compensation scheme, unlike Bank of Cyprus.

This is due to a technicality – whereas the Bank of Cyprus UK is a full-blown subsidiary, Laiki's British presence is via branches of the main, Cyprus-based bank.

This means British savers in Laiki will get the same deal as their Cypriot counterparts – meaning any deposits more than €100,000 could take a devastating hit of as much as 40pc.

The island’s largest deposit taker, the Bank of Cyprus, has a UK offshoot with around 50,000 savers holding £910m. Bank of Cyprus UK has operated on these shores for half a century, but until last year was not part of Britain’s savings protection scheme.

Each European country runs its own compensation scheme and each must guarantee the first €100,000 that savers hold.

Bank of Cyprus UK, which offered competitive fixed savings rates of more than 4pc in 2011, was previously part of the Cyprus scheme – so savers in Britain would have had to wait for compensation to come from there. With an eye on the trouble looming, it moved across to Britain’s FSCS last summer.

A spokesman for the bank said it was ring-fenced from the parent bank. He said: “Bank of Cyprus UK is self-funded and does not rely on support from our parent in Cyprus or the interbank market for liquidity.”

The FSCS offers £85,000 compensation per person, per bank. But savers should closely follow the rules, depositing no more than £85,000 with any one banking group. Watch out for shared licences. For instance, Halifax and Saga both operate under a Bank of Scotland licence so cover is £85,000 in total. Savers are advised to spread money more widely. More is explained here.

Those living in Cyprus with money in foreign-owned banks are not affected by the freeze on accounts and would not face a seizure of their savings.

But British individuals and companies have an estimated €2 billion (£1.7 billion) held on the island, the second highest amount of any EU country behind Greece.

The nightmare endured by savers in Cyprus, including thousands of British expats, has given a shuddering insight into how governments will act in a financial crisis.

The island needs to find more than €5.8bn to qualify for a €10bn rescue package. Failure to reach an agreement could leave it, and its banks, bankrupt.

Banks remained closed and internet accounts frozen after a proposed raid on bank accounts was rejected by the Cypriot parliament. The original proposal was to skim at least 6.75pc from all savings and current accounts and 10pc on deposits of more than €100,000.

This was watered down to protect those with small savings, up to €20,000, but the plan was still rejected

Another proposal was also rejected today – by EU officials this time. Nicosia had proposed winding up Laiki, the island’s second-largest lender, and splitting it into a “good” and “bad” bank, with larger deposits over €100,000 folded into the latter. Deposits up to €100,000 would be guaranteed.

If a deal is reached ahead of the Monday deadline – and smaller deposits are affected – the UK Government has promised to compensate any British Armed Forces personnel left out of pocket. That generosity, however, will not be extended to the island’s 60,000 British expats, who hold €2bn (£1.7bn) in accounts.

Failure to strike a deal could cause economic collapse and force Cyprus out of the European Union, which it joined in 2008. The value of any assets not lost in the collapse of the banks would be devalued as the country would be forced to return to the Cyprus pound or a new currency, of far lower value than the euro.